The US House and Senate want to start refining mortgage legislation on Tuesday. The legislation would try to enforce the biggest overhaul to mortgage lending rules in decades. The mortgage legislation is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are trying to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.
Mortgage rules to prevent one more financial crisis
Proposed changes to mortgage lending rules consist of a whole lot of new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that these rules will affect how expensive mortgages can be and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine needs numerous of the lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that caused the financial disaster.
Are the mortgage lenders going to behave?
With mortgage legislation that needs that all lenders will hold a stake, the idea is that they will act more professionally with their underwriting. When lenders sold their risk along with their loans, they were careless and then handed out numerous loans which were destined for default. It was reported by the Wall Street Journal that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and do not interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at 3 percent of the loan.
New rules on a lot more expensive mortgages?
Banks say new mortgage lending rules about risk retention are likely to make mortgages more expensive for consumers because banks can be required to hold more capital, a challenge for smaller lenders. But Housing Watch said that the consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules are likely to make more paperwork for borrowers, but they already push a lot of paper trying to get loans in today’s constricted credit markets. A lot more diligence from banks about totally verifying a borrower’s income to prevent default should be good for everyone.
Finding a way to protect borrowers from predators
New mortgage lending rules will contain compensation guidelines that prevent lenders from making more money by making riskier loans. This provision of the financial reform bill would bar lender-paid commissions depending on the rate or type of loan. It was reported by the Wall Street Journal that brokers say the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. All of the consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Barry Zigas, director of housing policy for the Consumer Federation of The US told the Journal the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”
Saving from themselves mortgage lenders
Other new mortgage rules that are being fought include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also do not like the rule that requires them to prove that it is probably going to be within the borrower’s best interest to finance a loan, instead of just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders really just don’t want borrowers to be able to sue them if they violate the new mortgage rules. As outlined by Industry lobbyists this would make purchasing mortgages too risky for investors.
Find more data on this topic
Housing Watch
housingwatch.com/2010/06/21/new-mortgage-rules-may-hurt-borrowers/
Wall Street Journal
online.wsj.com/article/SB10001424052748704050804575318753964100106.html?mod=googlenews_wsj
